psychometric risk profiling questionnaire

dunstonh

adifor wrote: »

The link provided gives the self same test as the paid version.

I would have thought that strange but having just checked the link then it says it is free for a limited period. Maybe they are hoping that if they give it free initially that some people will pay for another one in future.

BobQ

Meeper wrote: »

A robust risk profiling exercise combines examination of tolerance, capacity and goals in order to promote further discussion with the client with regard to how their goals may be outside of their tolerance or capacity, and the implications of this, etc.

As with any psychometric measurement you have to question the validation that these things undergo. In some contexts (eg where it is used as a basis of a discussion) its a reasonable starting point in that it encourages the subject to think about the issues behind the question. In this situation the interviewer can ask the question "do I believe what this test is telling me?". But like any tool, in untrained hands it can be dangerous and even in trained hands it can be applied incorrectly.

I am curious how such professional tests are validated given the inputs and outputs are quite subjective. Even if the test can be shown to provide a reliable assessment how do they verify its a correct assessment for an individual seeking to make a financial decision?

dunstonh

I am curious how such professional tests are validated given the inputs and outputs are quite subjective. Even if the test can be shown to provide a reliable assessment how do they verify its a correct assessment for an individual seeking to make a financial decision?

In the advice world, the answers are not taken as gospel. a number of the questions ask the same question but in different ways. You look for differences in the answers. You also have to look at the financial state of the individual to see if their responses are realistic to their financial position.

They are you say as basis for further discussion, especially if the questions lead to conflicting answers (i.e. if you had £100k, how much could you afford to lose - person says £10k. Similar question says the same but uses percentages instead and the person answers 20%. There you have a sizeable difference that would need to be discussed)

The tools have developed a lot over the years but the problem will always remain that humans are not logical or consistent and saying they can accept loss on a form is not the same as actually accepting loss when the statement comes in.

fairleads

dunstonh wrote: »

They are you say as basis for further discussion, especially if the questions lead to conflicting answers (i.e. if you had £100k, how much could you afford to lose - person says £10k. Similar question says the same but uses percentages instead and the person answers 20%. There you have a sizeable difference that would need to be discussed)

Investment decisions based on how much you think a person can afford to lose? .....Beggars belief

fairleads

Meeper wrote: »

I use a tool which compares not only the questions (tolerance for risk) but also assess the clients asset and liability situation and what they can afford to lose (capacity for risk) along with their goals and targets for the investment over the period.QUOTE]

Capacity to lose?

A robust risk profiling exercise combines examination of tolerance, capacity and goals in order to promote further discussion with the client with regard to how their goals may be outside of their tolerance or capacity, and the implications of this, etc.

The true purpose of the risk profile is to shift both the consequences and, more important, the responsibility of investment decisions from the adviser to the client.

jem16

fairleads wrote: »

Investment decisions based on how much you think a person can afford to lose? .....Beggars belief

The idea is to see at what point someone would begin to panic if their investment took a downturn as will surely happen at some point. This gives a better understanding of their risk tolerance than asking them how much they want to gain.

The true purpose of the risk profile is to shift both the consequences and, more important, the responsibility of investment decisions from the adviser to the client.

For me it formed the basis for discussion. If we had gone on the results alone I would have been given a much higher risk than I actually was comfortable with.

What do you think should happen?

gadgetmind

qpop wrote: »

Thanks for this, will be a useful link for many I'm guessing.

For me it said, "Your score is 66. This is a very high score, higher than 94% of all scores."

It then described how others in the same "risk group" as me would have answered the questions but my answers were substantially different right across the board.

fairleads

jem16 wrote: »

The idea is to see at what point someone would begin to panic if their investment took a downturn as will surely happen at some point. This gives a better understanding of their risk tolerance than asking them how much they want to gain.



For me it formed the basis for discussion. If we had gone on the results alone I would have been given a much higher risk than I actually was comfortable with.

What do you think should happen?

Risk profiling places far too much emphasis on a clients attitude to risk rather than scenario or situation risk.
For example, i believe there is no such thing as a risky asset ( within assets currently discussed in this forum) only risky scenarios. Eg, cash is a more risky asset for long term wealth accumulation than say equity income. However, this must be tempered with the current state of the market and the method of investing. So cash might appear to be inappropriate for a client whose horizon is 20 yrs. However, when taking the clients method and including the current state of the market into account we might find that a client intending to invest a significant lump sum for a long period, at a time when the market has been on a roll for 5 yrs might be better off investing in cash until value returns to the stock market. Unfortunately there ain't much for the adviser in that scenario. So the industry risk profiles the person. The result then very often allows the adviser to advise equity investments which as we all know paid trail commission etc. Essentially it allows advisers the opportunity to legally sell commission producing investments that they might not get away with under a different profiling methodology.
However, i have to say - that with all the info available to the public at large - may be some of the public should also take a little more responsibility for their own actions. After all, very often sh*t does happen because we allow it.

gadgetmind

fairleads wrote: »

For example, i believe there is no such thing as a risky asset ( within assets currently discussed in this forum) only risky scenarios.

Agreed. You also need to look beyond risk to see if the risk brings enough reward (alpha) or not. I found the questionnaire hard at times as none of the answers matched my view on the matter.

The result then very often allows the adviser to advise equity investments which as we all know paid trail commission etc

Not all equity investments pay trail, not even all those recommended by IFAs.

jem16

fairleads wrote: »

For example, i believe there is no such thing as a risky asset ( within assets currently discussed in this forum) only risky scenarios.

Agreed. Each asset has its own different kind of risk.

However, when taking the clients method and including the current state of the market into account we might find that a client intending to invest a significant lump sum for a long period, at a time when the market has been on a roll for 5 yrs might be better off investing in cash until value returns to the stock market.

Timing the market can of course be one method of investing. However the only true measure of the bottom is one taken with hindisght. You may get it right, you may not.

Unfortunately there ain't much for the adviser in that scenario. So the industry risk profiles the person. The result then very often allows the adviser to advise equity investments which as we all know paid trail commission etc.

Not all equity investments pay trail and a fee based adviser would be rebating that trail anyway.

Essentially it allows advisers the opportunity to legally sell commission producing investments that they might not get away with under a different profiling methodology.

Such as?